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S&P Keeps Hold on Google

Google (GOOG): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

The Wall Street Journal reports Microsoft (MSFT) will soon launch its algorithmic search service, which has been in beta since June, 2004. This debut has been largely anticipated, and we don't believe it will have a near-term material impact on Google. However, we think Microsoft also has designs on the sponsored search segment, and related progress could hurt Google. Also, some 39.7 million Google shares (14% of third-quarter diluted shares outstanding) become available for sale

within days. Nonetheless, we think Google has notable sales and profit momentum, and our 12-month target price stays at $190.

Lockheed Martin (LMT): Upgrades to 2 STARS (avoid) from 1 STAR (sell)

Analyst: Robert Friedman, CPA

The giant defense contractor's continuing desire to bolster its financial strength, primarily via ongoing debt retirements, is giving us confidence that financial discipline is finally becoming ingrained in the company. Consequently, we are lowering the free-cash-flow discount rate in our discounted-cash-flow model from 10% to 9%, and raising our 12-month target price from $43 to $50. That said, we still forecast that the mediocre defense industry business fundamentals will keep their 10-year free-cash-flow growth rates and return on equity in what we see as the tepid 6% to 7% and 12% to 15% range, respectively.

Cisco Systems (CSCO): Reiterates 4 STARS (accumulate)

Analyst: Ari Bensinger

Cisco posted October-quarter earnings per share of 21 cents, vs. 17 cents, in line with our estimate, but sales and gross margins were at the low-end of guidance. While router sales were hampered by the launch of a new integrated core and access products, switching sales beat our expectations. We believe that Cisco's strategy of competing on features through greater product integration will allow it to gain shares from stand-alone application vendors. We are reiterating our fiscal 2004 (July) earnings-per-share estimate of 90 cents, and our fiscal 2005 earnings-per-share estimate of $1.05. Based on discounted-cash-flow and p-e metrics, our 12-month target price is $23.

Costco (COST): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Joseph Agnese

Our downgrade is based on valuation as Costco shares approach our 12-month target price. We believe the company will maintain low double-digit sales growth in fiscal 2005 (Aug.), on 7.5% square-footage growth and comparable-store sales growth in the mid-single digits. We think margins should be favorably impacted by a change in product mix, reduced health care and workers compensation costs, and improved sales leverage. We are maintaining our fiscal 2005 earnings-per-share estimate of $2.15. However, we are raising our target price by $2 to $51, based on our discounted-cash-flow and p-e analyses.

Motorola (MOT): Reiterates 5 STARS (buy)

Analyst: Kenneth Leon, CPA

Motorola says it will distribute its equity interest in Freescale Semiconductor (FSL) to shareholders on December 2. Motorola expects to distribute 0.11 of a share of Freescale Class B common stock for each Motorola share owned on the November 26 record date. With full separation of both companies, we believe Motorola's sales growth may increase to the 15% to 17% range, compared to 15% for the company before the spin-off. Motorola's free cash flow may also be enhanced with the removal of Freescale's capital intensive semiconductor business. Priced below peers on price-to-our 2005 sales estimate, we would buy Motorola.

Lucent (LU): Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA

We see the tentative labor agreement between Lucent and its two major labor unions as a positive. The parties are expected to finalize a 7-year, 7-month contract that offers a 16.28% rise in wages, compounded over the life of the agreement, and a solution for healthcare benefits to retirees. While the company's market for optical and wireline products has weakened, we believe its strong ranking in CDMA wireless systems and cost controls may allow it to remain profitable. Our 12-month target price is $4. With shares trading below peers at 2 times our fiscal 2005 sales estimate, we would hold.

Honda Motor (HMC): Maintains 2 STARS (avoid)

Analyst: Christopher Lee

We view Honda's plan to expand production capacity in China as a vote of confidence in its growth prospects in China amid slowing sales. In our opinion, Honda continues to demonstrate a well thought out execution strategy for its growing franchise in China. However, we are concerned about the company's substantial exposure to the U.S. market, due to a weakening U.S. Dollar against the Yen, intensifying competitive pressure, and rising interest rates. Our 12-month target price remains $23, based on a 10% discount to the median price-to-book value multiple for the past three years.

Cablevision Systems (CVC): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

In its third-quarter call, Cablevision said the Rainbow DBS spin-off is on track for fourth-quarter wrap. But with the pending SEC probe, we think the timeframe is unclear. Meanwhile, with stagnant growth at the satellite start-up, cash burn could ramp up. Assuming a fourth-quarter DBS spin-off, we are widening our 2004 loss estimte by 5 cents to $1.53, with a $73 million free cash-flow deficit. With higher advanced services penetration, we are narrowing our 2005 loss estimate by 15 cents to $1.05, with $133 million of positive free cash flow. We are raising our target price by $2 to $22, with 10.5 times its 2005 estimate. Free cash flow is seen as a fair valuation vs. its cable peers.

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